Taxation and Skills
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This Tax Policy Study on Taxation and Skills examines how tax policy can encourage skills development in OECD countries. This study also assesses the returns to tertiary and adult education and examines how these returns are shared between governments and students. The study builds indicators that examine incentives for individuals and governments to invest in education. These indicators take into account the various financial costs of skills investments for individuals such as foregone after-tax earnings and tuition fees, as well as whether investments are financed with savings or with student loans. Costs borne by governments such as grants, scholarships, lost taxes, and skills tax expenditures are also accounted for. The indicators also incorporate the returns to skills investments for individuals and governments through higher after-tax wages and higher tax revenues respectively.
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Taxation and Skills
- 1. Taxation and Skills OECD EDUCATION AND SKILLS WEBINAR SERIES David Bradbury Head, Tax Policy and Statistics Division Deborah Roseveare Head, Skills Beyond School Division Pierce O’Reilly Economist, Tax Policy and Statistics Division
- 2. • Contribute to the debate on the taxation of human capital investment in the context of inclusive growth • Much empirical focus on tax rates on physical capital, but what about tax rates on human capital? – What are the effective tax rates on human capital/skills investments? – Are we getting the mix right between investment in physical and human capital? – Physical and human capital are complementary: investments in physical capital often need skilled labour to deliver higher returns and increased productivity 2 Tax and Skills Tax Policy Study Background to the study
- 3. • Covers 29 OECD countries, incorporating PIT but not SSCs • Simulates the financial costs and returns of skills investments as shared between individuals and the government, to calculate: – Value of tax expenditures for skills in PIT and SSC systems – Effective tax rates (ETRs) on skills investments – Returns on investment to governments resulting from skills investments (i.e. through higher taxes and reduced tax expenditures) – The additional income needed for an individual’s skills investment pays for itself 3 The scope of the project Tax and Skills Tax Policy Study
- 4. 4 Type of costs Government Student Costs (Direct) • Direct Spending • Scholarship Spending • Tuition Fees • Books, Materials Costs (Indirect) • Foregone Tax Revenue • Foregone Post-Tax Income Returns • Higher Tax Receipts Post-Education • Higher Post-Tax Income Costs and returns
- 5. 5 Case studies 27-year-old continuing student (1 year of education) 17-year-old college/ university student (4 years of education) 50-year-old worker retraining (1 year of education) 32-year-old worker completing in-work training (2 weeks of training) 1 2 3 4 Four stylised education scenarios are modelled
- 6. 6 Tax expenditures support skills Results presented for the 17 year old university student case 0 500 1000 1500 2000 2500 3000 3500 4000 Iceland Greece Chile Israel CzechRepublic Switzerland Turkey Mexico Ireland Denmark NewZealand Canada Spain Portugal Italy Luxembourg Austria Hungary UnitedKingdom Finland Australia Sweden Netherlands Norway Belgium Poland Estonia SlovakRepublic Slovenia ValueofSkillsTax Expenditures,USD Value of Tax Expenditures for Skills
- 7. 7 ETRs on skills investments Results presented for the 17 year old university student case 0 5 10 15 20 25 30 35 40 Chile Poland Turkey NewZealand Estonia UnitedKingdom SlovakRepublic Sweden Switzerland Norway Israel Spain CzechRepublic Mexico Greece Slovenia Ireland Canada Austria Italy Hungary Denmark Belgium Portugal Iceland Australia Finland Luxembourg Netherlands AverageEffectiveTaxRate,% Average Effective Tax Rate on Skills
- 8. 8 Costs and returns to governments 0 0.5 1 1.5 2 2.5 3 Turkey Sweden NewZealand Ireland Denmark Norway Estonia Poland Spain Chile SlovakRepublic Switzerland Canada Belgium Finland Austria Greece Mexico Israel UnitedKingdom Italy CzechRepublic Iceland Slovenia Australia Hungary Luxembourg Netherlands Portugal AverageReturnstoCosts Ratio Lower Returns to Government From Education Spending Higher Returns to Government From Education Spending Breakeven Point (Income Taxes Only) Ratio of income tax returns to government Results presented for the 17 year old university student case
- 9. 9 For students, education pays for itself 0 50 100 150 200 250 Denmark Ireland NewZealand Norway Turkey Greece Sweden Belgium Estonia Spain Austria Australia Iceland Finland Netherlands Israel Italy UnitedKingdom Switzerland Canada Luxembourg SlovakRepublic CzechRepublic Portugal Poland Mexico Hungary Slovenia Chile %ofWageBeforeEducation Actual Labour Market Premium for Education Required Breakeven Premium Results presented for the 17 year old university student case Gap between actual return on investment and breakeven return
- 10. • On average, tertiary education pays for governments in higher income taxes alone (other taxes omitted from analysis) • Study provides cross-country data support for education spending – NB. not necessarily for all countries and all kinds of education as returns vary Higher Skills Higher Wages Higher Tax Revenue Investments in skills: deliver a financial return for students and governments
- 11. • Tax support for skills is generally modest, though varies across countries and contexts • Tax deductions for skills problematic: – Generally regressive – May reduce labour market flexibility – May not support the right skills investments • Policies to reduce credit constraints and reduce market failures potentially most effective, e.g. training funds & accounts, and income-contingent loans 11 Effectiveness of skills tax expenditures How effective are skills tax expenditures?
- 12. • What is the impact of income tax progressivity on skills investment incentives and inclusive growth? – Tax expenditures generally favour higher income earners – While progressivity taxes away the returns to skill investments, most investments pay a healthy return to the individual – Progressive income tax delivers a good return on skills investments for government through higher tax revenue – To support inclusive growth we should support skills investments through spending and it makes financial sense to do so 12 Income tax progressivity and skills Inclusive growth perspective
- 13. 13 Taxation and Education Finance Financing Skills by Governments, Firms and Individuals • Study highlights that education is key to ensuring strong future tax revenue. • Tax revenue is also key to supporting public investment in skills. • Tax incentives can also be a way to ensure that individuals, firms, and governments provide a sustainable funding basis for skills investments. • This means that finance and education ministries need to work together in countries to get tax and skills policies right.
- 14. • OECD national skills strategies provide countries with a strategic approach to skills policies. • Each project fosters collaboration across ministerial portfolios and levels of government while engaging all relevant stakeholders. • Projects to date in Austria, Italy, Korea, Mexico, the Netherlands, Norway, Peru, Portugal, Slovenia and Spain. • The involvement of Ministries of Finance in these projects has highlighted the importance of designing tax policies with skills in mind, and providing solid public financing for skills. 14 National Skills Strategies Supporting Countries’ Skills Policies
- 15. Contact details David Bradbury Head of the Tax Policy and Statistics Division Centre for Tax Policy and Administration 2, rue André Pascal - 75775 Paris Cedex 16 Tel: +33 1 45 24 15 97 David.Bradbury@oecd.org || www.oecd.org/tax 15 Deborah Roseveare Head of the Skills Beyond School Division OECD Directorate for Education and Skills 2, rue André Pascal - 75775 Paris Cedex 16 Tel: +33 1 45 24 17 54 Deborah.Roseveare@oecd.org || www.oecd.org/edu
- 16. 16 www.oecd.org/tax/taxation-and-skills-9789264269385-en.htm Follow us on Twitter @OECDtax and @OECDEduSkills Taxation and Skills Also available: • country notes • dataviz • brochure Further information
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